Recognizing the Bias: Financial Cycles and Fiscal Policy

IMF Working Papers, November 24, 2015

Source details

Canonical URL

Recognizing the Bias: Financial Cycles and Fiscal Policy

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Authors: Nina Budina, Borja Gracia, Xingwei Hu, Sergejs Saksonovs
• Published: November 24, 2015
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781513508863.001

Main argument

• Asset price cycles have significant effects on fiscal outcomes.
• There is evidence of debt bias—the tendency of debt to increase over the cycle—that is significantly larger for house price cycles than stand-alone business cycles.
• Automatic stabilizers and discretionary fiscal policy generally respond to output fluctuations, whereas revenue increases due to house price booms are largely treated as permanent.
• Neglecting the direct and indirect impact of asset prices on fiscal accounts encourages procyclical fiscal policies.

Evidence and mechanisms

• Debt bias is observed over the cycle and is "significantly larger for house price cycles than stand-alone business cycles."
• Fiscal policy instruments respond asymmetrically:
  • Automatic stabilizers and discretionary fiscal policy respond to output fluctuations.
  • Revenue increases linked to house price booms are largely treated as permanent, creating a channel for debt accumulation.
• The interaction of housing cycles and fiscal accounting drives a procyclical bias in public debt paths.

Policy implications and recommendations

• Fiscal policy frameworks should account for asset price cycles—especially house price cycles—to avoid procyclical outcomes.
• Policymakers should distinguish between cyclical revenue gains from house price booms and permanent revenue increases to prevent treating boom-related revenues as recurring.
• Strengthening fiscal policy design to incorporate direct and indirect impacts of asset prices can reduce the tendency for public debt to rise over the cycle.

Keywords and subjects highlighted

• Subjects: Debt bias, Financial cycles, Financial sector policy and analysis, Fiscal policy, Housing prices, Prices, Private debt, Public debt, Tax policy
• Keywords include: bias estimate, cycle episode, cycles result in a public sector debt bias, debt, debt bias, Financial cycles, Global, growth episode, growth shock, house price cycle episode, house price cycles result in a public sector debt bias, house price episode, house-price shock, housing cycles, Housing prices, output gap downturn, price, private debt, public debt, state dummy, WP

Recognizing the Bias: Financial Cycles and Fiscal Policy — IMF Working Paper (November 24, 2015).

Content in this bundle

• 1. Houses Price Episodes
  • 1. Houses Price Episodes (Markdown version)
  • 1. Houses Price Episodes (PDF)